Institutional investors are taking a hard look at their alternative risk premium strategies after poor performance in 2018.
Managers of the actively managed multiasset, long/short, factor-based strategies favored by asset owners as portfolio diversifiers suffered last year from what sources said was a rare combination of an unfavorable macroeconomic environment, anxiety about rising inflation and heightened market volatility, which affected returns.
Wide-scale redemptions of alternative risk premium strategies by asset owners haven't surfaced, but investment consultants said a number of chief investment officers and their teams are conducting behind-the-scenes reviews in advance of presentations to their boards of trustees.
Among the institutional investors holding firm on their investments are the $31.1 billion South Carolina Retirement Systems, Columbia, and the $16.8 billion Hawaii Employees' Retirement System, Honolulu.
“Asset owners are examining why they invested in alternative risk premia strategies because they are frustrated by 2018 results,” said Reino G. Ecklord Jr., Chicago-based research consultant, hedge funds at NEPC LLC.
“Clients are revalidating their commitment to these approaches. There has been a pretty constructive level of examination and dialogue,” Mr. Ecklord said.
He stressed that long-term investors such as pension funds, endowments and foundations “need to be sanguine about alternative risk premia strategies in all market conditions because they can exhibit short-term variance.”
Performance in 2018 was disappointing, sources agreed, with a -5.14% average return compared to 7.98% in 2017 for the 22 alternative risk premium strategies in the investment database maintained by eVestment LLC, Marietta, Ga.
Returns of alternative risk premium strategies improved to an average 2.46% in the first quarter of 2019 compared to a -3.02% return in the quarter ended Dec. 31, the eVestment analysis showed.
Institutional investors are frustrated because for many, the primary motivation for investing in multiasset alternative risk premium strategies is the diversification they provide to reduce risk from traditional asset classes, said Kevin Machiz, vice president in capital markets research for investment consultant Callan LLC, San Francisco.